2001 financial examination blue cross blue shield of michigan michigan office of financial and...
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2001 Financial Examination Blue Cross Blue Shield of Michigan
Michigan Office of Financial and Insurance Services
Commissioner Frank M. Fitzgerald
September, 2001
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 2
Michigan Office of Financial and Insurance Services’ (OFIS) role as regulator of Blue Cross Blue Shield of Michigan (BCBSM)
The purpose and scope of the financial examination
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 3
Over 50% of Michigan’s population depends on BCBSM for coverage and service
Michigan historically has relied on BCBSM for affordable and accessible health care coverage
BCBSM is Michigan’s “insurer of last resort”
The Importance of BCBSM
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 4
BCBSM Family Organizational Chart
PPOM The AccidentFund Company
Global HealthOptions
75% Ownership
Health First50% Ownership
BCN Management
Company
Blue Cross Blue Shieldof Michigan (BCBSM)
BCN of Michigan
BCN ServiceCompany
BCBSM Foundation
Blue Care, Inc.
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 5
BCBSM Mix of Business
Line of Business 1993 1999 2001Small Group (ARS) 24.5% 25.7% 25.5%Large Group (ERS) 16.0% 15.9% 17.0%Non Group 0.9% 0.5% 0.4%Group Conversion 1.0% 0.5% 0.5%Medigap 2.6% 2.1% 1.8%ASC (self-funded) 53.8% 54.2% 54.8%
All Lines 100% 100% 100%
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 6
BCBSM AT A CROSSROADS
Safe and solvent today, BCBSM shows disturbing trends and symptoms. Ignoring these problems will threaten BCBSM within the next decade.
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 7
Why BCBSM is at a crossroads
Losses in the small group market Information systems Cash strain Inadequate investment return Strain of Administrative Services Contract
business Management and board structure
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 8
Losses in the Small Group Market
Total BCBSM and Blue Care Network lives is 1,372,664 In the past 5 years, BCBSM has lost over $400 million in
this market lineSmall Group Average Monthly Premiums for Hospital & Medical Coverage
Individual 2 person FamilyContract Contract Contract
1997 $178 $375 $4191998 $198 $414 $464Change 11% 10% 11%1999 $234 $490 $549Change 18% 18% 18%2000 $248 $522 $584Change 6% 7% 6%
Cumulative Change 39% 39% 39%
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 9
Losses in the Small Group Market
BCBSM responded by making the loss an asset by using Financial Accounting Standard (FAS) 71 – a unique response
Making the loss an asset (a receivable) means it must be recovered within a reasonable amount of time or it will become a loss to BCBSM
Recovering the loss will add to future premium increases for small businesses caused by medical inflation
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 10
Information Systems
BCBSM has outdated technology systems The OFIS financial examination showed serious
shortcomings in the use of data by BCBSM Ratemaking data is unavailable or not readily
usable The cost of upgrading the system is estimated at
$300 million or more
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 11
Cash Strain – Blue Care Network (BCN)
$54 million expense to merge 4 regional Blue HMOs into BCN
$134.3 million BCN total loss from 1998 – 2000 $18.2 million BCN loss to date this year Decline in BCN net worth from $190.7 in 1996 to
$60.2 million on 2001 BCBSM is the “parent” that must support BCN
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 12
Cash Strain of Acquiring and Operating Affiliated Companies
BCBSM acquired Accident Fund Company and PPOM for cash – $272.1 million and $182.6 million respectively
Accident Fund Company provided no return for five years
Investments in affiliates account for 40% of total invested assets, almost 20% of total assets, and almost 100% of stock holdings
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 13
BCBSM Investment Return
BCBSM INVESTED ASSETSBonds 824,339,310 47%Common Stocks 579,008,195 33%Real Estate 211,583,618 12%Cash and Sort-Term Investments (28,579,345) -2%Other Invested Assets 185,532,084 10%Total Invested Assets 1,771,883,862 100%Total Assets 3,669,366,663Invested Assets as a % of Total Assets 48.3%
Investment Return Excluding 56,271,523Affiliated Investments and 1,186,159,184Associated Dividend Income 4.7%
Investment Return as a 56,271,523Percentage of Total Assets 3,669,366,663Excluding Affiliated Investments 1.8%
= Net Investment Income / 105,562,188 Average Invested Assets 1,737,189,640The usual investment return includes 6.1%Results between 4.5% -10.0%
INVESTED RETURN
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 14
Inadequate Investment Return
Real estate is 12% of total BCBSM assets
There is no return on these real estate assets
$108 million in appreciated BCBSM real estate value is not being used in any manner
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 15
Inadequate Investment Return
Common stock investment is 33% of invested assets – almost all in affiliated companies returning little to BCBSM
Overall return on investments as percentage of total assets (excluding affiliated investments) is 1.8%
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 16
Inadequate Investment Return – Advances to Providers
This is a monthly outflow of money that does not earn interest for BCBSM
BCBSM is historically put in the less favorable position of hospitals owing it money
Advances To Providers:Asset Liability Difference
3/31/2001 $265,429,232 $194,069,851 $71,359,38112/31/2000 253,180,397 178,282,439 74,897,95812/31/1999 172,869,563 183,288,855 (10,419,292)12/31/1998 298,946,340 188,866,526 110,079,81412/31/1997 350,187,018 190,144,166 160,042,852
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 17
Strain of Administrative Services Contract (ASC) Business
Traditionally, this represented half of BCBSM premium revenue
$4.5 billion returned $6.6 million in 1999 New reporting requirements will disallow reporting
this as premium It is questionable whether this business is
appropriately leveraged by BCBSM to the benefit of subscribers
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 18
Management and Board Structure
1 Chief Executive Officer, 1 Executive Vice President, 10 Senior Vice Presidents and 27 additional Vice Presidents
Bonus plan and performance levels do not properly incentivize management
35 member board – large by industry standards Statutory mission – PA 350, Section 550.1201
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 19
Consequences of maintaining status quo
Threat to affordability of and access to health care coverage
Declining BCBSM asset value for Michigan Will BCBSM as we know it exist at decade’s end? These possibilities do not leave Michigan with the
best BCBSM health care asset There are no easy or quick fixes for BCBSM
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 20
Age Rating Is Not The Answer
BCBSM controls 57% of the small group market BCBSM and BCN control 71% of the small group
market Total BCBSM and BCN lives is 1,372,664 – the
next largest competitor is 210,712 OFIS approved price adjustors for group size and
participation percentages are stemming losses
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 21
BCBSM’s Board and Management Must Refocus
Greater attention to the BCBSM’s statutory “charitable and benevolent” mission
Acting competitively, not monopolistically Leveraging BCBSM’s strengths in a
competitive and changing health care coverage marketplace
Michigan Office of Financial and Insurance Services – BCBSM 2001 Financial Examination 22
Next Steps
Meet with Governor John Engler Share findings with legislators Take a more proactive approach
toward BCBSM by OFIS and the Commissioner